Small Cap Funds: Are you investing in mutual funds .. but find out .. | Consider these factors before investing in small cap funds

The number of people investing in mutual funds has been steadily increasing lately. Mutual funds, however, are a risky business.

Small Cap Funds: Are you investing in mutual funds .. but find out ..

Axis Mutual Fund

The number of people investing in mutual funds has been steadily increasing lately. Mutual funds, however, are a risky business. That is why those who invest in mutual funds are advised to choose funds based on their risk. Those who want growth despite the fear of loss can invest in equit funds. There are many types of equity funds. Largecap, midcap and smallcap Large cap funds have slightly lower risk. The risk is higher in mid and small cap funds. However, the return on these is likely to be higher. The stocks of companies with a market capitalization of Rs 5,000 crore are called small cap stocks. Small-cap funds should set aside 65 percent of their holdings to buy shares in small-cap companies. The remaining 35% of the money can be used to buy shares and securities in other sectors.

Companies start their journey small and gradually grow into larger companies. Small-cap funds have the opportunity to identify and invest in such companies. It also depends on the ability of the fund manager. That is why investing in small cap funds can lead to higher returns. Even if the fund manager’s expectations are wrong, the value of small-cap funds will depreciate rapidly even if the markets suffer huge losses. It may take a long time to recover. That is why there are some factors to consider before selecting these types of funds.

Small cap funds invest in stocks of small companies that have grown in business in the short term. The faster they grow, the faster they are likely to mature. These are only suitable for investors who know when to exit. The small cap index is well undervalued so do not assume that the return on investment during this period will be accurate. The risk of loss is high for these. That is why investors need to weigh their risks before choosing funds.

The performance of the funds selected for investment should be constantly reviewed. It is a good idea to look at certain ratios when choosing mutual funds. If the beta ratio is less than one it means the risk is low. Also, the higher the alpha ratio, the higher the return. Simultaneous investing in small cap funds carries a ‘timing risk’. Investing in regular installments (SIP) on a monthly installment basis will reduce the risk and increase the chances of making higher profits.

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